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For years, security officials and experts have warned about the energy infrastructure’s susceptibility to cybercrime

The ransomware attack that forced the closure of the largest U.S. fuel pipeline this weekend showed how cybercriminals pose a far-reaching threat to the aging, vulnerable infrastructure that keeps the nation’s energy moving.

Colonial Pipeline Co. closed its entire 5,500-mile conduit carrying gasoline and other fuels from the Gulf Coast to the New York metro area Friday as it moved to contain an assault that involved ransomware, code that holds computer systems hostage. So far, no evidence has emerged that the attackers penetrated the vital control systems that run the pipeline, according to people familiar with the matter.

But the consequences of an infection spreading to that deeper layer are dire for any energy company. Many machines that control pipelines, refineries and power plants are well past their prime, have few protections against sophisticated attacks and could be manipulated to muck with equipment or cause damage, cybersecurity experts say.

Last year, a ransomware attack moved from a natural-gas company’s networks into the control systems at a compression facility, halting operations for two days, according to a Department of Homeland Security alert. The company, which Homeland Security didn’t name, didn’t have a plan to respond to a cyberattack, the agency said.

The Colonial ransomware attack is a high-profile example of the online assaults that U.S. companies, schools, hospitals and other organizations now face regularly. It should also serve as a wake-up call for the energy industry’s particular exposure, according to consultants and others who work with companies to shore up cybersecurity.

U.S. and industry officials have known for years about such problems surrounding the nation’s energy infrastructure. A cybersecurity unit of Homeland Security said in 2016 it had worked to identify and mitigate 186 vulnerabilities throughout the energy sector, the most of any critical-infrastructure industry that year. In 2018, federal officials warned that hackers working for Russia had infiltrated the control rooms of U.S. electric utilities.

The energy industry is a big target. The U.S. has roughly 2.5 million miles of pipelines. Across that vast network are hundreds of thousands of devices—sensors that take myriad readings, valves that help control flow and pressure within a pipeline and leak detection systems—and all are vulnerable to attack, security experts said.

Refineries have even more valves and sensors than big pipelines, and there are about 135 of those across the country. That doesn’t include electric utilities and all the components of the sprawling power grid.

Colonial ferries 100 million gallons a day of gasoline, diesel and other refined petroleum products from the country’s chief refining corridor along the Gulf Coast to Linden, N.J. It transports roughly 45% of the fuel consumed on the East Coast, according to the company’s website.

Curtis Smith, a spokesman for Royal Dutch Shell PLC, one the owners of the Colonial Pipeline, said Sunday it is still too early to “be specific about potential impacts to product flow.” He said Shell is actively engaged with Colonial.

The trade group American Petroleum Institute said it was closely monitoring the pipeline situation and that cybersecurity is a top priority for the energy industry.

API members are engaged continuously with the Transportation Security Administration, Cybersecurity and Infrastructure Security Agency and the Energy Department to “mitigate risk and fully understand the evolving threat landscape,” said Suzanne Lemieux, API’s manager of operations security and emergency response policy.

The type of attack that occurred against Colonial Pipeline is becoming more frequent and is something that businesses need to be concerned with, Commerce Secretary Gina Raimondo said Sunday.

The attacks are “here to stay and we have to work in partnership with businesses to secure networks, to defend ourselves against these attacks,” she said on CBS’s “Face the Nation.” Specific to the Colonial attack, “it’s an all-hands-on-deck effort right now.”

In response to the Colonial Pipeline shutdown, the Transportation Department’s Federal Motor Carrier Safety Administration said Sunday that it has issued a temporary hours of service exemption for trucks transporting gasoline and other refined products across 17 states, including Georgia, South Carolina, North Carolina and Tennessee. The move would allow flexibility for truckers delivering fuel, White House press secretary Jen Psaki said in a tweet.

On Sunday, Colonial didn’t provide a timeline for bringing the pipeline back into service but said that while its main lines remained offline, some smaller lateral lines between terminals and delivery points were once again operational. It said it was working to restore IT systems and developing a plan to start the pipeline back up when it had approval from federal regulators.

As markets opened Sunday evening, gasoline futures were up about 1.6% at $2.16 a gallon, after briefly rising more than 3% higher.

Analysts said a closure of the pipeline for a few days shouldn’t have dramatic market impacts, because inventories of gasoline have been readied for the summer driving season and usually get replenished every five to six days. But if the pipeline remains offline for five days or longer, shortages could begin to affect retail stations and consumers along the East Coast, they said.

According to a report by an International Business Machine Corp. unit, energy companies in 2020 sustained the third-most attacks of any industry, up from ninth the previous year, as cybercriminals ramped up assaults on firms with software connected to operational control systems.

The industry is ill-prepared for such attacks, security experts said. Some operational technologies—for physical systems like pipelines and the electric grid—have protocols that predate those for the internet, said Padraic O’Reilly, co-founder and chief product officer of Boston-based CyberSaint Security, who works with pipelines and critical infrastructure on cybersecurity.

“There are just as many [operational technology] vulnerabilities as there are IT vulnerabilities, but they’re scarier in a way because they can go cyber to physical,” Mr. O’Reilly said, noting the energy sector has the most physical infrastructure of any industry that his company works with.

These weak spots have been known for years, but most energy companies have only recently begun to implement defenses, such as firewalls, to protect control systems, said Raymond Sevier, a technical solutions architect with Cisco Systems Inc., who focuses on industrial systems.

The control systems were considered safe for years because they weren’t connected to the internet, but hackers have found ways to penetrate them through unsecured remote access and networked systems. Many companies have older, vulnerable Windows platforms still embedded within energy facilities, and efforts to implement cybersecurity measures rarely move beyond the pilot-program stage, Mr. Sevier said.

Because many industrial facilities run around the clock, it isn’t easy to take down plants to patch outdated systems, keeping older machines in place and providing “the perfect path for cyber pathogens” once they are connected to company networks, said Grant Geyer, chief product officer of Claroty Ltd., a cybersecurity company that specializes in critical infrastructure environments.

Energy companies and other firms that operate infrastructure have invested heavily in recent decades to automate their processes and reduce costs, said Mark Montgomery, former executive director of the Cyberspace Solarium Commission, a bipartisan policy group formed by Congress.

“It’s not matched by a similar investment in cybersecurity,” Mr. Montgomery said. “It’s creating a lot of risk and vulnerability that, obviously, criminals can exploit.”

Two people briefed on the Colonial Pipeline probe said the attack appeared to be limited to information systems and had not infiltrated control systems. U.S. cybersecurity firm FireEye Inc. was investigating the attack, according to people familiar with the matter.

It is unclear how long it could take to bring the Colonial Pipeline back into service, said Robert M. Lee, founder of the industrial cybersecurity firm Dragos Inc.

IT security incidents can typically take days to resolve, while an attack on control systems can take weeks, given the average age and complexity of those technologies and their proximity to core operations, Mr. Lee said.

Many companies, Mr. Lee said, have underinvested in operational technology security, and U.S. officials have largely pushed firms to focus on measures to prevent attacks. That approach has left gaps in some businesses’ ability to detect and respond to successful hacks, he said.

“Everything we’ve told our asset owners has been focused on preventive [security],” he said. “We need to shift that and focus on the whole approach.”

Cryptocurrency was trading lower after the Tesla CEO called it ‘a hustle’ in a sketch

Elon Musk kicked off his “Saturday Night Live” hosting debut finding a new target to mock: himself.

Mr. Musk, known for his awkwardness at times, also said he was the first person with Asperger’s syndrome to host the show—“or at least the first to admit it.” It’s the first time he has publicly said he has the condition.

The chief executive of Tesla Inc. and Space Exploration Technologies Corp., or SpaceX—and who is known for sometimes taking swipes at rivals on Twitter—issued a faux apology as part of the host’s customary opening monologue. “To anyone I’ve offended, I just want to say, I reinvented electric cars, and I’m sending people to Mars in a rocket ship,” Mr. Musk said. “Did you think I was also going to be a chill, normal dude?”

The early cracks stopped short of some of Mr. Musk’s edgier comments. In the past, he has taken swipes at the Securities and Exchange Commission and billionaire Jeff Bezos.

Mr. Musk, who has a history of comments that move markets, had a similar effect on “SNL,” when he appeared in its satirical news segment, Weekend Update, as “Lloyd Ostertag, financial expert,” who called himself “The Dogefather.”

After he expounded on the merits of the cryptocurrency using jargon, cast members Michael Che and Colin Jost repeatedly asked him to explain, “What is dogecoin?” Pressed by Mr. Che, Mr. Musk eventually said, “Yeah, it’s a hustle.”

The price of dogecoin, created in 2013 as a joke, surged as high as 74 cents early Saturday in advance of Mr. Musk’s “SNL” appearance, spurring hope among investors that it would cross $1 for the first time. The price wobbled between 49 cents and 69 cents for most of the broadcast, according to CoinDesk.

When the show ended, dogecoin was trading around 52 cents, putting its market value at about $72 billion—greater than the valuations of Kraft Heinz Co. Meanwhile, Robinhood, the online trading app popular with individual investors, said on Twitter during the program that it was experiencing issues with cryptocurrency trading. Robinhood later tweeted that the issues were resolved.

The stir created around the show since Mr. Musk was named as host last month suggests that “SNL” may see a surge in TV ratings. The show has drawn an average 9.2 million total viewers in its 46th season, according to Nielsen data. NBC said Sunday that Mr. Musk’s episode tied for its third-highest rated telecast of the season, behind Dave Chappelle in November and the season premiere hosted by Chris Rock in October.

NBC sought to capitalize on Mr. Musk’s global notoriety, live-streaming the show for the first time internationally in more than 100 countries.

In the run up to the show, which comes with a battery of sketch writers, Mr. Musk turned to Twitter to crowdsource ideas for his appearance from among his roughly 53 million followers. There the live-comedy novice took some online ribbing from “SNL” cast member Chris Redd for referring to a sketch as a “skit.”

Maye Musk made an appearance in keeping with a show tradition of bringing on cast members’ mothers on the eve of Mother’s Day. She said that she hoped her gift wouldn’t be the dogecoin her son has often tweeted about. Mr. Musk said it was.

His appearance on “SNL” is Mr. Musk’s latest excursion into pop culture. His casting credits include a number of film and TV cameos, such as “Iron Man 2” and episodes of “The Big Bang Theory,” “South Park” and “The Simpsons.”

Mr. Musk is one of a small cadre of business people to host “SNL,” which typically taps people from the entertainment world for the coveted role. The late George Steinbrenner, owner of the New York Yankees, hosted in 1990, and Ralph Nader, the high-profile consumer crusader, hosted in 1977. Publishing magnate Steve Forbes did the honors in 1996, shortly after giving up his pursuit of the Republican presidential nomination. Donald Trump hosted in 2004, when he was early in his tenure on the NBC reality series “The Apprentice,” and again in 2015, when he was vying to be the Republican candidate for the White House.

Unlike some hosts who play a more passive role in the comedy, Mr. Musk appeared in the majority of live sketches and prerecorded bits. In one segment, Mr. Musk, who longs to colonize Mars, issued commands to a Mars mission that relied on a slacker character played by Pete Davidson. Mr. Musk also showed up in the sketch, “Gen Z Hospital,” playing a bearded doctor and managing to deliver youth slang with a straight face. He also dressed up as the Nintendo character Wario for a parody of anti-Italian bias in the Super Mario videogames. In another segment, set in the Old West, his character talked about electric and self-driving horses and attacking the enemy through an underground tunnel, a reference to Tesla cars and his tunnel-digging venture, the Boring Co.

In his opening monologue, Mr. Musk made light of the name of his youngest child, X Æ A-Xii. “It’s pronounced cat running across the keyboard,” he said.

He also joked about a now-infamous incident from a few years ago. “A lot of times people are reduced to the dumbest thing they ever did, like one time I smoked weed on Joe Rogan’s podcast,” Mr. Musk said. “And now all the time I hear, ‘Elon Musk, all he ever does is smoke weed on podcasts,’ like I go from podcast to podcast, lighting up joints.”

In several segments, Mr. Musk played off his socially awkward side, in keeping with his statement that he has Asperger’s. The condition is a form of autism that affects how a person makes sense of the world, processes information and relates to others.

Mr. Musk often has used his large public persona to serve as a way to promote his company’s products, with Tesla forgoing the cost of TV commercials used heavily by many rival car makers. In parallel with the “SNL” appearance, Tesla showed off in New York its coming pickup truck, unveiled more than a year ago with somewhat botched showmanship. Some rival electric-vehicle makers ran ads during the show.

Deal’s expected cash proceeds of roughly $625 million will accelerate Benson Hill’s bid to bring down plant-based food costs, CEO says

Benson Hill Inc. is going public by merging with a special-purpose acquisition company in a deal that values the plant-growing technology firm at $2 billion, the companies said.

The operator of a platform that uses machine learning, simulations and genetics to optimize plant growth, Benson Hill is combining with the SPAC Star Peak Corp. II. STPC -0.20% Benson Hill says it can develop breeds of crops like soybeans and yellow peas that mature faster, have higher protein content or taste better, saving growers time and resources.

Such ingredients are key for plant-based meat alternatives, and the company is also developing products for animal feed. Cheaper, more-sustainable plant-growing methods are needed to feed the world’s growing population and accelerate the fight against climate change, analysts say.

The St. Louis-based company expects to begin commercial production of its ultrahigh-protein soybean by next year and is developing a yellow-pea protein concentrate. It also has a unit that sells fresh produce to grocery stores and food distributors. The roughly $625 million in expected cash proceeds from the deal will accelerate Benson Hill’s bid to bring down plant-based food costs, Chief Executive Matt Crisp said in an interview.

“It’s positioning us to really gear shift into another level of growth,” he said.

Founded in 2012, Benson Hill expects last year’s sales of about $100 million to surge as it provides more products to food companies, restaurants and grocery stores.

Existing investors in the company include GV—the venture-capital arm of Alphabet Inc. —and agricultural trading giants Bunge Ltd. and Louis Dreyfus Co. Investors including funds managed by BlackRock Inc., Van Eck Associates Corp., Hedosophia and Lazard Asset Management are putting money into the deal through a $225 million private investment in public equity, or PIPE, associated with the merger. Those funds and money held by the SPAC are expected to yield the roughly $625 million in cash proceeds.

Benson Hill joins the group of early-stage companies tied to sustainability, such as vertical-farming company AeroFarms, that are raising money and going public through SPACs.

“If you’re serious about decarbonizing the economy, you have to decarbonize [agriculture],” said Mike Morgan, chairman of the Star Peak Corp. II SPAC and chief executive of asset manager Triangle Peak Partners LP.

Star Peak II is the second blank-check firm backed by Mr. Morgan—a former executive at energy infrastructure firm Kinder Morgan Inc. —and investors at the hedge fund Magnetar Capital. The team’s first Star Peak SPAC recently took clean-energy storage firm Stem Inc. public.

Magnetar is among the biggest SPAC investors and had nearly $2.9 billion in blank-check company holdings at the end of 2020, according to a compilation of regulatory filings by data provider SPAC Research.

SPACs like Star Peak II are shell companies that list on an exchange to acquire a private firm and take it public. They are also called blank-check companies. Merging with a SPAC has become a common way for startups to raise large sums and access investors who are excited about themes like sustainability. One reason is that SPAC mergers let startups make rosy projections about their business, which aren’t allowed in a normal initial public offering.

SPAC executives argue that they are accelerating growth for technology-driven businesses that could eventually change the world. Skeptics contend that some low-revenue firms going public via blank-check companies aren’t ready to do so and could hit individual investors with losses if their technology fails. Concerns about tighter regulation and lofty valuations have in recent weeks dragged down shares of SPACs and companies they have taken public.

So far this year, SPACs have raised more than $100 billion, according to SPAC Research, surging past 2020’s record total of more than $80 billion.

After the deal closes later this year, Benson Hill is expected to trade under the ticker symbol “BHIL.”

Star Entertainment proposes merger with Crown to create $9.4 billion Australian casino company

SYDNEY—U.S. private-equity giant Blackstone Group Inc.’s move to acquire Crown Resorts Ltd. and expand its global gambling footprint has been complicated by a new bidder for Australia’s largest casino operator.

The Star Entertainment Group Ltd., which also operates casinos in Australia, said Monday that it wants to merge with Crown to create a gambling giant with casinos across Australia, including in Melbourne, Sydney and Perth.

Star says its offer values Crown’s stock at more than 14 Australian dollars, equivalent to $11, per share. Star is offering 2.68 of its own shares in exchange for every Crown share and a cash option of A$12.50 per share for up to 25% of Crown’s shares on issue.

Blackstone, which already has real-estate assets in Australia and a gambling footprint in other countries, such as the Cosmopolitan casino and resort in Las Vegas, has also increased its bid, Crown said. Blackstone is now offering A$12.35 per share for Crown, up from a proposal worth A$11.85 per share, with the increased bid valuing Crown at roughly $6.5 billion. Blackstone already owns nearly 10% of Crown, making it the second biggest shareholder.

A Blackstone representative didn’t have an immediate comment on Star’s bid. Crown said its board hasn’t yet decided whether the proposals are in the best interests of the company.

Shares in Crown and Star rose in early trade Monday. Crown was up more than 7% to A$13.00 and Star rose more than 7% to A$4.20.

The bidding battle for Crown comes as regulators investigate the company’s business practices and threaten to rescind its casino licenses, which until Blackstone’s bid in March had depressed Crown’s share price, making it more attractive to potential suitors. Casino stocks in general also took a hit during the coronavirus pandemic, as local lockdowns forced many to close temporarily and international travel restrictions made it difficult for casinos to attract overseas tourists, including lucrative highrollers.

Crown operates casinos in Melbourne and Perth, but the opening of a new casino in Sydney has been put on hold after an investigation found Crown unsuitable to operate the casino without significant changes. The investigation, set up by the gambling regulator in New South Wales state, found that Crown disregarded the welfare of its employees by pursuing highrollers in China, which ultimately culminated in the arrest of Crown employees there.

Bank accounts at Crown subsidiaries were used to launder money, and Crown improperly worked with junket operators in Asia to bring gamblers to Australia, the investigation also found. The regulator began looking into Crown after the questionable business dealings were reported in local media.

Crown previously took steps to address some of the issues raised by the New South Wales investigation, such as ceasing all ties with junkets and creating a compliance and financial-crimes department. Since the investigation concluded, Crown’s chief executive and several board members have exited the company. But officials in other Australian states have also opened their own investigations into Crown.

Star’s proposal to create one large Australian casino company would need approval from Australia’s competition regulator, though Star said that it is confident the regulator would sign off on the deal, without elaborating. Star already operates casinos in Sydney and Brisbane, Australia’s first and third most populous cities, respectively, and in the Gold Coast, a popular tourist destination.

Any deal could also be dependent on the support of Australian billionaire James Packer, who controls a 37% stake in Crown through his investment company, Consolidated Press Holdings. The New South Wales investigation criticized Mr. Packer, who previously sat on Crown’s board but no longer does so, for wielding too much control over the company.

Mr. Packer’s company said in a statement in early April that it is open to considering any suitable transaction for Crown shares. Later, Crown said it had received a proposal from Oaktree Capital Management, another U.S. asset manager, to finance a buy back of the Crown shares held by Mr. Packer’s firm.

Star said the merged company would have an equity value of A$12 billion, equivalent to $9.4 billion, assuming the cash option was taken up. It said a combined casino operator would benefit from increased scale and diversification, offer an enhanced range of experiences for domestic and international guests, and could unlock further value from a potential sale and lease-back of properties. Star estimated that the combined company could reduce annual costs by up to A$200 million.

“With a portfolio of world-class properties across four states in Australia’s most attractive and populated catchment areas and tourism hubs, the combined group would be a compelling investment proposition and one of the largest and most attractive integrated resort operators in the Asia Pacific region,” Star Chairman John O’Neill said.

Analysts have long speculated on the possibility of a merger between Star and Crown, though some have been skeptical. In February, analysts at Citi said they didn’t see financial merit in a merger, arguing the cost savings are limited and largely driven by head office consolidation and nongambling procurement.

Crown, which operates a private gambling club in London aside from its Australian casinos, once had a wider international footprint and was seeking to expand further. But it pulled back from its global ambitions after the arrest of its employees in China in late 2016, and sold off a stake in a Macau casino operator and pulled out of a Las Vegas casino project.

U.S. firms have previously expressed interest in Crown. In 2019, Wynn Resorts Ltd. made an indicative takeover offer that then valued Crown at $7.1 billion, but Wynn called off the discussions after saying Crown had prematurely disclosed their talks.

Recovery fund set to drive EU rebound, say economists

Forecasts of impact by Brussels and member states have been conservative according to analysts

The boost to Europe’s pandemic-stricken economy from as much as €800bn of EU funding over the next five years is on track to help the region rebound close to its pre-crisis growth path, according to economists.

The biggest European countries have submitted plans for spending their share of the vast amounts of grants and loans that Brussels is offering to help repair the economic damage done by the Covid-19 pandemic.

The plans, backed by an unprecedented programme of collective European Commission borrowing underwritten by member states, are heavily focused on investments in green and digital projects, as well as reforms to improve the efficiency of the public sector. 

Morgan Stanley estimates the EU project will boost eurozone gross domestic product by 3.5 per cent and Jacob Nell, head of European economics at the US investment bank, said this would help the bloc to “get back through the pre-pandemic trend of growth”. 

The commission is due to present its own assessment of the economic outlook on Wednesday. The recovery fund, known as Next Generation EU, was largely excluded from its previous assessment released in February because there was insufficient detail available from member states. 

Economists’ forecasts vary widely, but most who have examined the national plans submitted to Brussels so far believe they will produce a substantial boost to growth likely to be greater than either the EU or the countries themselves have predicted.

“There are conservative assumptions being made by EU governments on how much of a fiscal multiplier these investments will have,” said Marion Amiot, senior European economist at S&P Global Ratings, the credit rating agency. “So there may well be some upside risk.”

While most countries have assumed that every €100 invested would produce a €40 uplift to GDP, S&P assumed the money would generate at least a one-to-one uplift, possibly more.

S&P forecast the almost €400bn of grants from the EU would boost the region’s GDP by between 1.5 and 4.1 per cent over the next five years, depending on how much of the funds are actually spent and how well they are used.

But Amiot said the overall impact was likely to be higher because S&P has not assumed that any of the €386bn of EU loans on offer will be taken up, nor has it counted on any boost from public sector reforms. 

This already looks conservative because out of the 14 countries that have submitted plans to Brussels so far, five have requested more than €150bn in loans. Some that did not request loans, such as Spain, have said they plan to do so at a later stage.

In addition, several countries are supplementing the money from Brussels with funds from their national budgets, including about €60bn in France and just over €30bn in Italy.

The IMF added only a “relatively conservative” 0.75 percentage point GDP boost in its latest European forecast to cover the EU funding. But it said “the real GDP impact could be twice that or more if the money is well spent and accompanied by needed structural reforms”.

Nell at Morgan Stanley said several countries seemed to have “lowballed” the amount of extra growth their plans could produce, adding: “I understand why they have done that, because it is better to underpromise and overdeliver.”

Greece’s plan, which won praise in Brussels for its coherent design, predicted a 7 per cent boost to GDP by 2026. Yet Morgan Stanley estimated Greece would experience an uplift closer to 12 per cent, while S&P said it could be as high as 18 per cent — the highest of any country.

Nell said some of the biggest uncertainties over the programme included how effectively and how much of the money would be spent. In the six years to 2020, EU countries on average only spent just over half the money they were allocated by Brussels.

But the so-called absorption rate of EU funding was closer to 90 per cent in the six years after the 2008 financial crisis, suggesting countries are better at putting funds to work in downturns similar to the current one.

Since the EU economy shrank 6.2 per cent last year, with GDP falling by a tenth in both Greece and Spain, the region has been lagging its main trading partners in the US and China. The outlook for the European economy has, however, brightened recently, partly due to an expected spillover from the $1.9tn fiscal stimulus programme in the US. 

With European vaccination campaigns accelerating after a shaky start to the year and lockdowns easing in some countries, recent surveys of EU businesses and households have found their confidence rebounding to well above pre-pandemic levels. As a result, economists are watching to see if the commission upgrades its forecast for EU growth of 3.7 per cent in 2021 and 3.9 per cent in 2022.

Once the commission receives all EU countries’ “recovery and resilience” plans it has two months to assess them. Member states are being required to set out highly detailed milestones and targets that must be met for disbursements of EU cash to be made. For some, such as Spain and Italy, reforms include overhauls to government procurement rules ensuring the cash is well spent. 

But the programme comes at a time of mounting worries about corruption and the rule of law in some member states. For example, spending scandals in recent years linked to European funds have included the EU’s anti-fraud office calling on Hungary to repay money for a metro line because of fraud and corruption concerns. 

Last month commission executive vice-president Valdis Dombrovskis insisted in an interview with the Financial Times that a “robust system” was being installed to ensure proper use of the EU funding. Monitoring the programme will represent a massive burden on the commission given the dramatic expansion in the flow of cash from Brussels to member states’ coffers. 

The Next Generation EU programme is pegged at a maximum of €800bn, of which half will be in the form of grants. The total size will depend on take-up of loans from the commission, which may not appeal to some countries that have lower borrowing costs. That is on top of the EU’s normal seven-year long term 2021-27 budget, which weighs in at €1.2tn. 

Debate rages over billions spent to prop up flag carriers as crisis reverses privatisation drive

European governments have gone retro. After the launch of privatisation in aviation two decades ago, the coronavirus crisis has caused a sharp policy reversal as countries across the continent have stumped up billions of euros in state aid to save their national flag carriers.

Paris has increased its stake in Air France-KLM to nearly 30 per cent, Berlin has taken a 20 per cent stake in Lufthansa, while Rome owns 100 per cent of Alitalia as more than €20bn has been invested in companies considered too strategically important to fail.

But a backlash against state support is growing as rival carriers fear an uneven playing field and warped competition. While governments defend investment as necessary to save airlines facing unprecedented short-term risks to their survival, critics say public money could allow propped up airlines to avoid tough decisions needed for long-term growth.

The fiercest critic has been Ryanair boss Michael O’Leary, who has filed 16 cases to test the state aid rules in European courts, arguing that support made available to flag carriers only is discriminatory and undermines the EU’s single market in air travel.

The Irish chief executive said companies such as Air France will never be able to pay governments back, but will be able to “subsidise and suppress competition for the next decade.”

“We, easyJet, [BA owner] IAG and the others have to compete with these state-aid, crack cocaine junkies.”

Ryanair has lost all five cases decided so far, but O’Leary told the Financial Times he thinks there is a “very strong likelihood” his low-cost airline will overturn the verdicts on appeal.

The pandemic has also highlighted differences between the continental Europeans, where state-aid rules were relaxed to help companies survive the crisis, and the US and UK.

The British and Americans have stopped short of taking equity stakes despite offering billions in loans and other financial support, leading some to argue their airlines will emerge stronger as they have been forced to make aggressive cuts to navigate the crisis.

“When we’re out of this, it will be immensely liberating for the companies that don’t have governments in their register, to do continuous improvement, to be nimble and agile,” Shai Weiss, the chief executive of Virgin Atlantic, told the FT. 

“I think the payback will be once we are in safe harbour. We’ve just learnt to work with [other airlines receiving support].” His airline was refused a rescue package by the UK government last year, and raised cash privately.

The ever-bullish O’Leary agrees, insisting government intervention creates a long-term opportunity for airlines like his “to become ever more efficient and competitive, just to survive against the billions of state aid”.

But the support has also underlined the importance of airlines as significant employers and strategic assets that governments were unwilling to let fail during the crisis.

Not only have the companies welcomed the support to cope with the passenger collapse, but falling share prices have made them cheaper takeover targets for foreign competitors.

“In Europe, this crisis has revived old concerns,” Martin Vial, who runs France’s state equity investments, told the FT, alluding to the potential threat of US or Chinese groups building up stakes in domestic companies on the continent.

Governments “have to make sure that some of the biggest businesses in these countries, private or public, do not fall victim to predators because obviously the crisis is going to open up opportunities,” he added.

Vial, who sits on the board of Air France-KLM, also stresses airlines are important strategically “for France as they are for other European countries”.

“You have to take into account that over the past year, some 15 airline groups have received state capital support. Air France-KLM is not an exception.”

Analysts agree there is a strong argument for viewing flag carriers as strategic. 

“Let’s say some midsized company from France wants to build a new production plant in Bratislava. Will it build that plant in Bratislava, if it couldn’t rely on there being consistent air services to that place?” said Daniel Roeska, an analyst at Bernstein.

He believes many airlines would have gone under without state support. “We have seen states in general inject money to maintain services and help these companies survive. If governments had not done that, we would have had a flood of bankruptcies.”

In Italy, the government has gone the whole hog, nationalising its flag carrier Alitalia in 2020, with plans to relaunch it through a new company called ITA.

Although admitting to being “very saddened” to lose the old brand, Italian prime minister Mario Draghi hopes ITA will eventually be able to survive without public support.

“Someone my age has travelled almost his entire life with Alitalia, it’s like being part of a family . . . an expensive one, but nevertheless a family,” he told a press conference in April.

But before Rome can consider any exit plans, it must first wrestle with Brussels over state aid conditions.

Italy’s previous government put aside €3bn for the new national airline, but the European Commission is demanding a major reduction of airport slots — one of the loudest complaints from rivals — the sale of handling and ground services as well as job cuts in order to give the plan the green light.

Italian politicians are insisting any reduction must be in line with the limited hit Air France-KLM took at Paris Orly.

In France and Germany, full state ownership is not on the agenda.

Paris is adamant it will not nationalise Air France-KLM, promising to scale back its equity investment over time, and at a profit, while the German government has said it also hopes to make a small profit and sell its stake when the airline “is fit again”.

Air France-KLM is expected to need further recapitalisation measures, including perhaps from the Dutch state, while Lufthansa shareholders this month approved a future capital raise to help pay back some of the government support.

“We are not in the same world as maybe 20 or 30 years ago. We are not in a state of mind where state aid is given without expecting economic performance in return,” said Vial, pointing to the strides Air France had made before the crisis when the state was already a 14 per cent shareholder.

But restoring the health of the airlines may take longer than expected. 

Bernstein’s Roeska warns the legacy carriers will wear the scars of the crisis for years as they struggle to deleverage and restructure to adapt to a smaller marketplace. “The price will be lower growth,” he said.

The carriers also face constraints in exchange for state support, including meeting new environmental standards.

In France, ministers are backing laws culling flights, if there is an alternative train option of under two hours and 30 minutes. Vial argues this will eventually be seen as an asset as customers demand greener travel options.

But interventions like that have raised deeper concerns. Andrew Charlton, an aviation analyst who led the privatisation of Australian carrier Qantas in the 1990s, argues it is difficult for governments to maintain a boundary between fair competition and their own interests when holding airline stakes. 

“What is the analysis that calls for governments and countries to have their flag flown around the world? The concern is you will be unconnected to the world, but really — no one is going to fly to Paris or Berlin?”

Greensill Bank collapse pits German government against lenders

State-owned Hypo Real Estate says it is eligible for compensation from scheme funded by private banks

Hypo Real Estate, one of the biggest German casualties of the 2008 financial crisis, has lost €75m in the collapse of Greensill Bank, setting up a bizarre battle as it tries to recover the money.

HRE was among the depositors attracted by the relatively high interest rates offered by Greensill Bank, whose parent company, Greensill Capital, collapsed in March.

The Munich-based entity, which the German government was forced to take over, was one of the largest depositors at the bank, according to people familiar with the matter, after allocating the funds in 2018.

German financial watchdog BaFin shut down Greensill Bank in March after a forensic audit uncovered potential balance sheet manipulations. The regulator subsequently filed a criminal complaint against the bank’s management, which is now under investigation by Bremen public prosecutors.

Losses suffered by Greensill’s retail customers are covered by Germany’s deposit insurance scheme, which has already paid out more than €2.8bn to them. However, public sector institutions, as well as banks, are not protected by the programme.

HRE said that the insurance scheme, which is funded by the country’s banks and administered by the Association of German Banks, was refusing to compensate it, claiming that it was a financial institution and therefore not covered.

Before its government rescue in 2008, HRE was one of Europe’s biggest commercial property lenders. It was nationalised after a serious liquidity squeeze at its Irish subsidiary, costing German taxpayers €21bn.

The better parts of HRE were eventually listed in 2015 as Deutsche Pfandbriefbank, which is a member of the Association of German Banks. HRE no longer has any operating businesses, but is instead a state-backed entity focused on recovering the lender’s outstanding claims and reducing losses for the German taxpayer.

Given its role, HRE says it not a financial institution and is eligible for the insurance scheme.

“From HRE’s point of view, the total deposits of €75m are fully covered by the deposit insurance scheme,” HRE told the Financial Times, adding that it was therefore “expecting compensation”.

“This is a totally bizarre situation,” said one person familiar with the matter.

The collapse of Greensill Bank has reverberated across Germany. In an effort to escape negative interest rates, dozens of municipalities had together deposited up to €500m in the bank. Many are considering legal steps against the lender.

Germany’s private banking sector will bear the cost of Greensill Bank’s collapse, as it will have to fill the hole blown in the deposit scheme. Deutsche Bank said last month that it was expecting to contribute at least a further €240m by 2024, with about €70m due this year.

Greensill Capital, a supply chain finance company that relied on its German subsidiary for some of its funding, collapsed in March when insurers refused to renew cover.

The Association of German Banks declined to comment.

Supply chain finance scheme launched in 2012 helped failed contractor mask mounting debt

It was October 2012 and David Cameron was flanked by senior ministers — as well as Australian financier Lex Greensill — as he announced a new scheme designed to speed up payments to government suppliers.

The then British prime minister described the “supply chain finance” initiative as a “win-win” for industry, when the UK had only just emerged from recession. Under the scheme, suppliers’ bills were settled up front by banks, for a small charge, rather than the typical 60 to 90-day wait with contractors. The aim was to ease their cash flow at a time when banks were wary of traditional lending.

Cameron had no idea he was helping create a central plank in Carillion’s later scandal.

The British construction group went into liquidation in 2018 after it could no longer service its £7bn of debt, becoming one of the biggest corporate collapses in recent British history. It had just £29m of cash at the time.

In the midst of the crisis around Greensill Capital, the finance firm that fell into insolvency in March, the connection between Lex Greensill and Carillion has been only a footnote. But the way the outsourcer used supply chain finance to mask its mounting debts — something that helped it to continue to pay bonuses and dividends even as it veered towards collapse — can be traced back to that Cameron announcement.

Cameron revealed a long list of companies that had agreed to use Greensill’s big wheeze, which helped larger businesses to manage payments. Some of those companies quickly realised that loans to cover suppliers’ bills would not show up in their reported debt, helping to flatter their balance sheet.

Carillion’s use of supply chain finance became contentious because shortly after the scheme was launched, the company extended its maximum payment times to suppliers from 65 to 120 days — in effect forcing subcontractors to use the scheme, even if they had to pay a price.

Cameron “absolutely pushed” the supply chain finance initiative and sent a letter to the government’s 20 biggest suppliers urging them to come to a meeting at 10 Downing Street, where they were pressed to use the scheme, according to one person close to Carillion.

Carillion never used Greensill but its finance team had several meetings with the entrepreneur, who was working as an unpaid adviser in the Cabinet Office — with his own desk and team of four civil servants. Executives had “stars in their eyes about him”, said one former employee.

According to people briefed on the plans, Carillion set up its “early payment facility” — its own version of the scheme Cameron announced — after meeting with Greensill.

Senior executives at some of the government’s other big UK contractors were also called in to meet the entrepreneur.

“There was no real threat but there was a certain pressure put on because the government was a big client,” said the head of one then FTSE 100 contractor. “I thought it was odd that Number 10 pushed the scheme as Greensill was not a government official and interest rates were low at the time.”

“You aren’t going to bite the hand that feeds you,” said an executive at another contractor.

Outsourcers knew Greensill had the patronage of Cameron and Jeremy Heywood, then cabinet secretary, who used to work with the Australian financier at Morgan Stanley. Cameron went on to work for Greensill, lobbying ministers last year on behalf of the company.

Greensill also attended at least two meetings between Carillion and its subcontractors, where they were encouraged to use supply chain finance, said people close to the company. At a 2014 event at Wolverhampton Wanderers football club, next to Carillion’s headquarters, Greensill was billed as the key speaker. 

The company’s use of 120-day payment times meant there was a “huge incentive” to use the scheme, said one subcontractor who attended a Carillion event at the stadium.

At the time Carillion told suppliers it intended “to provide this facility indefinitely as a key part of the UK government strategy to stimulate growth within the economy”.

Greensill told the Financial Times he was not directly involved in the creation of the Carillion early payment facility and refused to comment on the Wolverhampton event. He will provide his own version of events when he gives evidence to a Treasury select committee inquiry on Tuesday. 

In the six years before its collapse, Carillion reported a robust financial performance. From 2011 to 2016, its reported debt rose only slightly from £839m to £850m.

But in the small print of its annual accounts, borrowing was ballooning. A footnote under “trade and other payables” showed debt in the early payment facility almost tripled, from £263m to £760m. 

As the debt mounted, Carillion continued to award generous pay packages and bonuses to directors and make payouts to investors. 

In the five years from 2012 it paid out dividends of £376m even though its operations generated just £159m of net cash. Richard Howson, then chief executive, who was unavailable for comment, took £5.6m in remuneration and added £1m to his pension, even as the company racked up a £990m pension deficit, for which taxpayers and retired Carillion workers later paid.

Bob Wylie, author of Bandit Capitalism, a history of Carillion, said the company’s early payment system made the balance sheet look “much better than it was”. 

A report by the business select committee in 2018 backed the view that Carillion used the facility to “systematically” shore up its fragile finances and present a “rosy picture” to the markets. Moody’s, the rating agency, argued that as much as £498m of debt was misclassified in the annual accounts. By labelling the early payment facility as “other creditors”, the figure was not incorporated in the company’s debt-to-earnings ratio, a key covenant test between Carillion and its lenders. 

Cameron’s representative said it was wrong to single out Carillion given the wider, successful use of supply chain finance by many companies. “This is utter nonsense,” he said.

Noble Francis, economics director at the Construction Products Association, said Carillion was the “worst abuser of the scheme but many of the largest construction firms have supply chain finance built into their business models as one way of making up for contracts won by bidding at low or negative margins”.

Kier, the struggling UK building contractor, reduced holdings in its scheme at the end of 2020, but said it would continue to offer it as it was “much appreciated by those who use it”. 

But Rudi Klein, an industry expert, is calling for supply chain finance to be banned. “It’s an absolute scam,” he said. “Carillion got free credit for about three months.”

“Why should workers have to pay to get paid? I don’t think the construction industry and David Cameron are going to be forgiven for introducing it.”